In re Appraisal of PetSmart Inc., 2017 BL 177567, Del. Ch., No. 10782
The Delaware Chancery Court has ruled that private equity investors paid fair value for PetSmart in their 2015 purchase of the company for $8.7 billion, citing reports by Analysis Group affiliate Andrew Metrick as supporting evidence in its decision. After the 2015 buyout took place, a group of hedge funds filed an appraisal action, which allows investors who oppose a buyout to ask the Chancery Court to determine the fair value of their stock. The hedge funds sought a premium of nearly $500 million on their 10.7 million shares of PetSmart, claiming the shares should have been valued at $128.78 per share, rather than the purchase price of $83.
Dr. Metrick was retained as an expert by Wachtell, Lipton, Rosen & Katz and Richards, Layton & Finger on behalf of BC Partners Inc., owners of PetSmart, and was supported by an Analysis Group team including Managing Principal Laurits R. Christensen and Vice President Michael Cliff. In his expert report, Dr. Metrick opined that the $83 merger price was “the most reliable indicator of fair value in the circumstances here.” Dr. Metrick also critiqued the opposing expert's discounted cash flow (DCF) model and found the valuation was flawed, because it was based on unreliable cash flow projections and did not provide adequate investment to fund the projected growth. Dr. Metrick provided alternative DCF analyses based on more appropriate inputs and assumptions, which resulted in a valuation corroborative of the $83 deal price.
After a four-day trial, Vice Chancellor Joseph R. Slights III ultimately found that the original purchase price of $83 per share, negotiated at arm's length in the midst of a fully functioning market, remained the fair and equitable value. Notably, his opinion favorably cited Dr. Metrick's response to a new DCF model based on alternative projections that petitioners introduced on the last afternoon of the trial. Whereas Vice Chancellor Slights opined that opposing experts had provided “flawed, post-hoc valuation,” he added that "I see no reason to alter the work [Dr. Metrick] performed."